A growing number of European foundations venture into investing

To learn more about the different types of impact investing, we spoke to the European Venture Philanthropy Association, which works with foundations to explore how they can use all of their assets for social good.

Peter Cafferkey, the EVPA's representative for the UK and Ireland and Alessia Gianoncelli, the head of the organisation's Knowledge Centre. EVPA

In 2004, a group of venture capitalists realized that the skills and approaches they were using to invest could have a big impact on social issues. They launched the European Venture Philanthropy Association (EVPA) which would serve as a catalyst for the new approach of venture philanthropy.

Alessia Gianoncelli, the head of the EVPA’s Knowledge Centre, and Peter Cafferkey, the organisation's representative for the UK and Ireland, tell us about their work.

What is venture philanthropy?

It applies ideas from venture capital to philanthropy, such as investors being highly engaged with investees and the concept of “patient” capital.

Venture philanthropists support purpose-led organizations financially and non-financially, with the primary objective to generate impact. Usually, they seek projects that may be higher risk than those that would interest other investors.

They measure and manage the impact they are making with data, much like venture capitalists do with financial data. Sometimes profit can be a goal, but it’s typically not the primary goal.

Your organization is about advancing the concept of venture philanthropy, right?

Yes, we have 300 members in the wider network, and most are impact investment funds and foundations. We refer to them as investors for impact. These members apply the venture philanthropy approach to their giving.

One thing our members are doing now is leading by example by examining the way they generate revenues. This is the next step from purely making money and then using the concepts of venture capital to give it away effectively.

The logic of making money with something that might have a negative social return and then giving it away for social good just doesn’t make sense.

Our members are exploring the idea that a foundation can bring all its assets to bear for social impact, not just being an asset manager of its endowment which then gives away interest earned for a good cause.

Alongside decisions with their investment portfolios, foundations can also use their brand, their name and the way they work with grantees to have an impact.

For example, some started using other financial instruments such as soft loans and recoverable grants to “recycle” their returns and use them again to make more of an impact.

Could you give me an example how a foundation has done this?

Calouste Gulbenkian is the largest foundation in Portugal. In 2019, it announced a $622mn asset divestment from oil and gas. It then engaged in numerous new investments, such as providing significant support for external impact funds.

There are lots of traditional foundations that are not even questioning whether they should invest their endowments responsibly with social purpose. We believe this is something that should change in the next five years.

What makes venture philanthropy different from impact investing?

All these things we’re talking about exist along a spectrum. At one end, you’ve got socially-responsible investing and ESG investing. Then you’ve got the idea of impact investing. Ideally, it is investing with equal focus on financial and social returns.

After that comes so-called investing for impact, a concept EVPA uses that is linked to the venture philanthropy approach. In investing for impact, the social side takes the lead. The social impact of an investment becomes non-negotiable in this type of investing.

Theoretically, impact investing is supposed to be a balance between social and financial good, but what we often see is that the financial aspect is non-negotiable and the social impact is an aspirational target.

As you move into the space of investing for impact and venture philanthropy, you move into an area where the impact is non-negotiable and the financial return is the “bet” or the “nice to have.”

Some foundations have come to the conclusion that they can help best by investing in places that mainstream capital would not. Why should a foundation put money into something Goldman Sachs or other mainstream investors have invested a million dollars into?

Foundations, also through their endowments, are in the position to be able to invest in projects where the social return is a guarantee and the financial return is higher risk. They want to fill a gap.

How has COVID changed the way foundations finance themselves in Europe?

Most of the people we spoke to said they are strengthening their collaboration with existing partners and are expanding to work closer with governments. Many want to be actors of change, not just be there to solve problems after an emergency happens. They feel they can contribute with their deep understanding of the social sector and social-purpose organizations.

Regarding the way they give money, the speed at which grant-making is done definitely increased. And we see that many foundations want to continue working at a higher speed and using agile working methods.

Many have set up emergency funds for the organizations they already support. They also became more flexible with their agreements with grantees.

Right after COVID hit, many foundations we spoke to were worried about the impact on their assets and endowments. But many that already had their pot of money are doing OK. It’s those foundations that are linked to companies and their profits that are in a difficult situation.

What is the best approach when the company behind the foundation is losing money or has to lay off people? The foundation’s source of funding declines at the time it needs to give the most grants.

So foundations are not looking for new ways to finance themselves?

There’s a genuine belief among the people we have talked to that there will be a financial reckoning, but that’s about two years away. The impact of COVID has not really been felt yet.

When the reckoning comes, European foundations may be looking for new ways to finance themselves. When U.S.-based foundations raised eyebrows by raising large amounts of debt earlier this year, European foundations mostly looked on with curiosity.

There’s a sense here that many foundations are just too small to raise debt. And there’s also an uneasy relationship with debt.